With energy prices
so strong in 2005, even well before the hurricanes slammed into the
Gulf, more and more investors are starting to pay attention to the
long-neglected realm of commodities.

Just as sectors in
stocks have interrelationships, so do sectors among commodities.
Late next year when the new Microsoft Windows Vista operating system
is released, a software event, it will drive massive sales of new
computer hardware as early adapters upgrade to run all the new bells
and whistles. This software release in one sector will spawn
hardware sales in another.

Events in one
commodity can also drive demand in another. For example, if
lumber demand is up due to huge numbers of new homes being built,
you can bet copper demand isnít far behind. The average new house
uses about 440 pounds
of copper. In
this case lumber doesnít drive copper directly, but residential
copper demand is sympathetic to and symmetrical to residential
lumber demand.

One of the most
well known commodities interrelationships exists between
oil and gold.
Oil is the most important commodity in our world, absolutely
essential for transporting everything physical that needs to move
from one place to another. And gold is the king of currencies, the
only government-meddling-proof and inflation-proof form of money in
six millennia of human history.

Since way back in
June 2000
when oil was still under $30 and gold remained under $285, I have
been studying and writing about the gold/oil ratio. Its basic
lesson is simple. Over secular timeframes as goes one so goes the
other. So if oil is up gold has a high probability of following
sooner or later. While considered fairly heretical over five years
ago, contrarians trading on this thesis including our clients have
earned huge profits since.

One professional
analyst even wrote me a few weeks ago and said he had seen one of
our famous Zeal Gold/Oil Ratio charts shown on CNBC! This is
fascinating as it means the mainstream is gradually starting
to shine light on an important trading principle that contrarians
have been profiting from for many years now. Like Army Rangers,
contrarians lead the way to profits and mainstreamers eventually
follow.

As Iíve been
writing about this Gold/Oil Ratio over the years, I have received
lots of feedback wondering about the Silver/Oil Ratio. Is there
also a meaningful historical relationship between silver and oil?
Can we profitably trade this relationship like we have done with the
Gold/Oil Ratio? To address these intriguing questions, I
investigated the silver/oil ratio this week.

Before we dig in,
I have to acknowledge one major bone of contention on silver. No
one, not even the central bankers who claim they own tens of
thousands of metric tonnes of gold, disputes that gold is money.
Since gold is money, it makes sense to price crucial things,
like crude oil, in terms of gold. Gold is a timeless
inflation-neutral currency that holds its value over centuries
regardless of government machinations.

But the monetary
nature of silver is heavily contested. There are some brilliant
contrarian thinkers who believe that silver is money just like
gold. They may be right. And there are other equally gifted
monetary minds who are convinced silver is just another commodity,
albeit highly alluring and speculative. Since there is not
universal agreement about the monetary nature of silver, please be
aware that the silver/oil comparison is not as philosophically tidy
as the gold/oil one.

Indeed, one of the
reasons silver has been struggling relative to gold in recent years
probably has to do with this monetary struggle. Silver canít seem
to decide at the moment whether it wants to trade like a precious
metal, monetary behavior, or trade like a base metal, like another
commodity. Personally I believe silver will trade like a
precious metal ultimately with gains far eclipsing goldís in
this bull, but I do acknowledge that the monetary case for silver is
not as clear cut as goldís.

So pricing oil in
silver certainly has some validity, but itís just not as sound as
pricing it in gold. Nevertheless, silver and oil have had strong
positive relationships and correlations during certain secular
epochs in modern history. Of particular interest, during the last
secular commodities bull in the 1970s silver tracked oil nicely.
Our first two charts are inflation adjusted based on the US CPI,
with oil and silver priced in constant 2005 dollars.

Weíve looked at
inflation-adjusted oil and gold prices many times since 2000, but
real silver prices are not as well studied. Diehard silver bulls
like me have to get a tingle of excitement sparking up their spines
when they see just how high silver went in its last major bull in
todayís dollars. The numbers achieved are truly mindblowing!

On a monthly
basis, and these charts are monthly since monthly numbers have less
random noise for correlation analysis purposes, silver topped near
$87 in todayís dollars in February 1980. But on a daily basis,
silver achieved its record high of $122 per ounce in 2005 dollars
back on January 21st, 1980. $122! So all those scoffers who think
even $20 this time around is an outrageous silver target are
thinking far too myopically for todayís monetary environment.

Since 1965, silver
and oil have had a 0.698 positive correlation. This is strong, but
nowhere near as tight as the gold and oil correlation of 0.816 over
this same period of time. In order to dig down and better
understand this long-term relationship between silver and oil, I
divided the chart above into five secular periods based on major
stages in oil price history. These are marked with the dotted
yellow arrows shown above.

Before the US
severed its
dollar-gold standard and went to totally unbacked pure fiat
currency in 1971, silver and oil actually had no correlation at
all. But in the 1970s up to the 1980 commodities tops, the positive
correlation between silver and oil jumped to its highest levels in
history, 0.780. This is quite fascinating as silver and oil did
have a strong positive relationship during the last great
commodities bull, which was the period of time most like today.

After this bull
market topped and started retreating in the first half of the decade
of the 1980s, silver maintained its strong correlation with oil.
But from the mid-1980s to the late 1990s, when oil ground sideways
to lower in real terms, the relationship between silver and oil
imploded. The correlation ran a very weak 0.216 which is not even
statistically relevant. But since this latest oil bull launched in
the late 1990s, silverís correlation with oil is once again
strengthening.

This secular
correlation analysis shows that silver does have a strong positive
correlation with oil during secular commodities bulls and the
secular bears that follow. The rest of the time silver seems to do
its own thing, but when oil is moving up in a long-term bull silver
tends to follow. This is great news for silver investors today who
are hoping silver will catch a bid based on strength in oil and
other commodities. Their thesis is rock solid historically.

Indeed silverís
ultimate bull-market gains ought to dwarf oilís. In the 1970s
commodities mega-bull oil blasted up nearly 1100%. But with a
jaw-dropping gain of nearly 2600%, silver utterly dwarfed oil before
their parallel bulls ultimately ran their courses. Silverís gains
actually ran 2.36x those of crude oil in the 1970s. And if you look
closely at this chart, the lionís share of silverís gains happened
in the final year or so before its blowoff top.

Today crude oil is
up nearly 500% while silver isnít even up 73% in its own bull to
date. Even if crude oil was to stop its advance right here in a
secular sense, extremely unlikely, then silver should have a long
way to run yet based on 1970s precedent. At a similar 2.36x
multiplier on oilís gains, silver would need to run 1166% or so
before its bull gives up its ghost. This yields an ultimate silver
target based on this thread of analysis near $55 per ounce!

One problem with
this chart is that silverís parabolic bubble top in 1980 was so high
that it distorts the rest of its journey. In order to better see
how these correlations stack up visually, I made another chart with
the silver price clipped at $30 real in order to show better
resolution on silverís non-bubble price activity. A couple of
interesting insights emerge out of this second real silver and oil
comparison.

As the correlation
numbers above indicated, we can indeed see a visual parallel between
silver and oil during the last great secular oil boom and bust of
decades past. And silver did carve a record real low in US dollar
terms right near the time oil was bottoming and preparing for its
next major upleg back in 2001. Indeed only a few years ago silver
in real terms was as cheap as it has ever been in US history and
probably world history as well.

Another
interesting aspect of this chart is silver has been locked in a
tight real trading range running from roughly just under $5 to $8 in
todayís dollars for over 15 years. Silver has made two recent
attempts to break above $8 in real terms but has failed so far. But
during one of these uplegs sooner or later silver will break through
and this will be a hugely bullish event. Look for speculators to
flood into silver once it decisively breaks out of its long-running
inflation-adjusted trading range.

Now that we know
there is indeed a historical relationship between silver and oil,
especially during major secular bulls and bears, it makes sense to
take a look at the Silver/Oil Ratio. This ratio, or SOR, simply
divides the dollar price per ounce of silver by the dollar price per
barrel of crude oil. It also offers some tantalizing price-target
insights that silver investors and speculators will definitely
appreciate.

At first glance
this ratio appears to be a simple downtrend rather than a horizontal
tradable trend pipe like the
Gold/Oil Ratio.
When I first created this chart I was kind of disappointed as it
didnít look anywhere near as clean as the GOR. After drawing some
trendlines and studying it a bit though, a stable trading range did
appear out of the noise. From 1981 to today, nearly a
quarter-century-massive slice of time, the silver/oil ratio does
indeed have a stable trading range.

In some ways it
even makes sense to cut out the activity prior to 1981. From 1971
to 1980 the commodities markets were grappling with a US dollar that
suddenly had no basis in reality, a pure fiat paper currency. The
commodities moves back then were so violent due to the currency
adjustments that we are probably not likely to see such violently
sharp moves again. After this adjustment more normal trading
conditions returned.

During the past
quarter century, on average the price of silver has been 0.26x the
price of a barrel of oil. This average line, shaded white above,
has been crossed nine times and nearly hit a couple more, so it is
rock solid. Around this average, standard deviation bands are
rendered. The SOR should be within +/- 1 SD 68.3% of the time, +/-2
SD 95.4% of the time, and +/-3 SD 99.7% of the time.

These bands help
define the probabilities of any particular SOR extreme being
sustainable. The further out from its 25-year average the SOR
travels, the less likely it is to remain at such extremes. And
today, interestingly, the silver/oil ratio is near its lowest levels
ever. Silver is only worth 0.11x as much as oil, an
unprecedented development in history. Markets abhor extremes and
usually mean revert back to norms.

Using these
probability bands, we can define various silver price targets based
on likely SOR mean reversions. For instance, the SOR spent roughly
half of its time in the past quarter century above its average.
Maybe seven of these years it was more than one standard deviation
above its mean. And for a cumulative time of a year or so it even
traded two standard deviations above its mean.

So odds are the
SOR will revert to these levels at some point. It is extremely
likely to at least return to its average, very likely to overshoot
and get to one standard deviation above its average, and there is a
possibility it will even blast up to two standard deviations above
its average. All we have to do is define a conservative oil price
target and then we can use these SOR tendencies to define silver
price targets.

Oil is in a
secular bull, there is no doubt about it. Global demand is growing
relentlessly, particularly out of Asia, yet world supplies are
barely keeping up and no major new oilfields are being found. So
oil prices are likely to continue higher for years to come on
balance. But, even in long-term secular bulls, periodic corrections
to bleed off over-enthusiastic sentiment are essential. Such an oil
correction is seemingly in progress today following its storm-driven
surge.

So far in its bull
to date, oil has
tended to correct to 95% of its key 200-day moving average.
Based on todayís prices, this yields a conservative oil price bottom
target of $53. If we set expectations for oil trading at this low
price for some time to come, which is unlikely but conservative, we
can use the SOR ratio to calculate some possible silver price
targets.

As you can see
above, in the past quarter century the SOR has spent very little
time under one standard deviation below its mean. If the SOR only
goes back up to these levels where it spent much time even since
2000, it yields a target silver price of $9.01 even at $53 oil. If
the SOR reverts back to its mean, as it certainly ought to, this
target rises to 0.26x the price of oil or $13.78 per ounce of
silver. And at +1 SD, our silver target balloons to $18.02!

Now there is no
doubt these silver targets feel high relative to todayís
abnormally low silver prices. But the silver/oil ratio has traded
in a strong horizontal trading range for a quarter century now and
certainly illustrates that such silver prices are not only possible
but quite probable. Most commodities tend to move together in
secular terms and silver and oil are no exception to this rule.
Silver really ought to follow oil higher.

Another way to
look at the relationship between silver and oil is the Silver Cost
of Crude Oil, or SCCO. This number reveals how many ounces of
silver it has taken to buy one barrel of crude oil throughout modern
history. While this number has been steadily climbing just like the
SOR has been falling, in the last 25 years some semblance of a
trading range has emerged. And todayís all-time-record high
SCCO is almost certainly not sustainable.

Today crude oil
priced in silver is way over three standard deviations above
its quarter-century mean! Such massive divergences are very rare in
the financial markets and are never sustainable. The only other
time in history that the silver cost of crude oil even came close to
+3 SDs was in the early 1990s when Iraq invaded Kuwait. And as you
can see above that earlier spike promptly crashed back down to a far
more reasonable average level.

Even though the
monetary nature of silver is contested, we can still use these SCCO
standard-deviation bands to define similar targets for silver. If
oil drops to the $53 correction low described above and the SCCO
mean reverts to various standard deviation bands, it gives us
potential silver targets that silver is likely to meander to as the
comfortable trading relationship between silver and oil during bulls
reasserts itself.

If the SCCO merely
goes back to +2 SDs, a high probability, it will take 7.33 ounces of
silver to buy a barrel of crude oil. At $53 this works out to a
silver price of $7.23, about todayís levels. But odds are the SCCO
will mean revert even farther, to +1 SD, the mean, or maybe even -1
SD. At +1 SD the silver price would rise to $9.04 at $53 oil. At
the mean it would catapult to $12.10. And at -1 SD silver would
need to hit $18.28!

This is obviously
wonderful news for silver investors. Silver and oil have a strong
positive correlation during oil bulls and their ratios tend to trade
within reasonably well-defined trading ranges. If the conservative
ends of these ranges hold and even if oil corrects, silver prices
still ought to go a lot higher from here based on their historical
relationship with oil prices. And if oil doesnít correct as much,
the silver picture is even brighter.

Now this
silver/oil relationship certainly isnít the only reason silver
prices should continue their bull market, and it isnít even the most
compelling. Yet, it offers one more facet of analysis that confirms
silverís dazzlingly bullish fundamentals. The price of silver is
undervalued now for a whole host of reasons including its
relationship with crude oil. Just as prudent investors used the
gold/oil relationship to earn fortunes in the past five years, a
similar awesome opportunity exists today in silver.

At Zeal we have
been painstakingly researching the best of the worldís silver
producers to prepare for this accelerating bull market in silver.
We are currently deployed in some of the best elite silver miners
that should leverage the gains of silver many times over.
Please subscribe
to our monthly
newsletter today to see our existing silver stocks and mirror
our new trades as this silver bull gains strength. Odds are
fortunes will be won and you may as well stake a claim.

The bottom line is
silver, even though its monetary nature is disputed, does
have a strong positive correlation with oil historically, especially
in major bull markets. And today oil and silver are once again in
such secular bull markets. Oil has advanced far ahead of silver,
but the historical relationship between these two commodities
strongly suggests silver will close this gap by catapulting ahead
sooner or later.

Todayís extremes
in the silver and oil relationship are almost certainly not
sustainable, and no matter what the oil price does the silver price
is likely to advance enormously when the silver/oil ratio inevitably
starts mean reverting. Will you be along for this extremely
profitable ride?